Rate Optimism Powers Market Rally In Third Consecutive Week

Barry Adams
15 Nov, 2023
New York City

Two inflation reports in as many days supported the case for an interest rate pause and an extended two-week rally.

The latest data on wholesale inflation and retail sales also supported the market's gains in today's session.

The steady decline in consumer price inflation in October and the core rate of inflation dropping to a two-year low were followed by a sharp decline in wholesale price inflation.

Two inflation reports confirmed that the Fed Reserve's policymakers may have more wiggle room than previously thought and that the central bank is more likely to hike rates at its next meeting in December.

For months, stocks declined on worries of rate path uncertainties, and investors lightened positions in interest rate-sensitive sectors including banks, commercial real estate, and technology.

However, after the Federal Reserve held rates steady for the second time in a row, it cleared the path for the market indexes to advance.

Investors are increasingly hoping that the central bank will be able to engineer a soft landing, simultaneously slowing economic growth and inflation without causing widespread job losses.

In today's trading, benchmark indexes extended this week's rally on the rising hope of the economy humming along at a slower pace and slowing the price increases to a more acceptable level.

The S&P 500 index and the Nasdaq Composite staged strong comebacks in November, 7% and 9%, respectively, after fears of higher rates receded and softer inflation in October contributed to the market's advance.

 

Wholesale Prices Post Largest Monthly Drop Since April 2020

The producer price index, a measure of wholesale inflation, declined 0.5% from the previous month in October, the U.S. Bureau of Labor Statistics reported Wednesday.

On an annual basis, the producer price index increased by 1.3%.

Wholesale price inflation fell at the fastest pace in a single month since April 2020, after good prices declined 1.4% following a rise since May and service prices were unchanged after advancing for six consecutive months.

 

Retail Sales Declined After Rising Six Consecutive Months 

After rising for six months in a row, retail and food services sales declined 0.1% in October from the previous month, the U.S. Census Bureau reported Wednesday.

Retail sales data adjusted for calendar and seasonal factors but not for inflation, suggesting higher prices are keeping consumer spending in check.

On an annual basis, retail sales rose 2.5% in October from an upwardly revised 4.1% in September.

Sales in the three-month period between August and October rose 3.1% from the same period a year ago.

Retail trade sales decreased 0.2% from September and increased 1.6% from a year ago; gasoline station sales were down 7.5% from a year ago; and sales at nonstore retailers increased 7.6% from a year ago.

 

U.S. Indexes and Yields

The S&P 500 index jumped 0.4% to 4,512.09, and the Nasdaq Composite rose 0.3% to 14,134.89.

The yield on 2-year Treasury notes increased to 4.88%, 10-year Treasury notes inched higher to 4.49%, and 30-year Treasury bonds edged up to 4.66%.

Crude oil decreased $1.68 to $76.57 a barrel, and natural gas prices rose 7 cents to $3.18 a thermal unit.

Gold decreased $1.68 to $1,960.94 an ounce after bond yields traded in a narrow range.

The dollar index, which weighs the U.S. dollar against a basket of foreign currencies, edged lower to 104.39.

 

U.S. Stock Movers

Target Corp. soared 14.2% to $126.65 after the retailer reported positive quarterly results.

Comparable sales in the third quarter declined 4.9%, and declines in discretionary categories were partially offset by an increase in daily necessities categories, including beauty.

Total revenue declined 4.2% to $25.4 billion, net income in the quarter advanced 36.3% to $971 million from $712 million, and diluted earnings per share rose to $2.10 from $1.54 a year ago.

Inventory at the end of the quarter was 14% lower than a year ago, after a 19% decline in discretionary category inventories.

The company guided fourth-quarter comparable store sales to decline in a wider range around the mid-single digit, reflecting uncertainties about holiday spending.

Advance Auto Parts declined 4.8% to $55.50 after the specialty retailer reported mixed quarterly results.

TJX Companies fell 2.5% to $90.20 after the apparel and household goods retailer reported positive quarterly results, but the company's guidance fell short of some investors' expectations.

Revenue in the third quarter ending in October rose 9% to $13.3 billion from $12.2 billion, net income advanced to $1.2 billion from $1.1 billion, and diluted earnings per share rose to $1.03 from 91 cents a year ago.

Comparable store sales in the quarter increased by 6%, slower than 14% a year ago.

U.S. comparable stores at Home Goods chain rose 9% compared to a decline of 16%, and Marmaxx stores (TJ Maxx and Marshall stores) increased 7% compared to 3% increase a year ago, respectively.

Total inventories at the end of the quarter were $8.3 billion, flat compared to a year ago.

During the quarter, the company repurchased $650 million of its own shares, retired 7.2 million shares, and paid $380 million in shareholder dividends.

The company now expects to repurchase approximately $2.25 billion to $2.5 billion of its stock during the fiscal year ending on February 3, 2024.

 

European Markets Extend Weekly Rally, Euro at2-month High

European stocks extended weekly gains, and bond yields in the region continued to drift lower.

Benchmark indexes in Frankfurt, Paris, and London advanced following the softer inflation report in the U.S.

The weakening of inflation in October to 3.2% from 3.7% in September supported the case for the U.S. Federal Reserve to hold rates steady at the next meeting and remove rate path uncertainties for the next two months.

Closer to home, investors reviewed the Eurozone GDP growth outlook, consumer inflation in France and the UK, and wholesale inflation in Germany.

 

Euro Area GDP Growth Estimate Lowered

The economic growth in the Euro Area was lowered to 0.6% from the previous estimate of 0.8%, according to the European Commission's Autumn 2023 Economic Forecast.

High inflation and interest rates and weak external demand in the currency union are negatively impacting consumers and businesses.

Among the larger economies in the region, Germany is expected to shrink by 0.3%, but France will grow by 1%, Spain by 2.4%, and Italy by 0.7%.

The commission also held its 2023 inflation estimate at 5.6%, but the slightly higher 2024 estimate was revised to 3.2% from the previous estimate of 2.9%.

 

UK consumer Price Inflation Dropped to 2-year Low 

Consumer price inflation in the UK dropped to a two-year low in October, according to the Office for National Statistics.

The annual inflation rate in the UK dropped to 4.6% in October from 6.7% in September, reflecting the sharp decline in energy and utility costs.

Inflation fell at the fastest pace in a month since 1992 after food price inflation eased to 10.1% from 12.2% in September and a 23% fall in energy price cap to £1,923 from £2,500 a year ago.

Despite the decline in inflation, prices are still rising at a faster pace than the 2% target set by the Bank of England.

 

French Inflation Eased in October 

In France, consumer price inflation declined to 4% in October from 4.9% in September, the statistical agency INSEE reported on Wednesday.

Weaker energy prices and rising interest rates played a key role in weakening inflation.

Energy price inflation slowed to 5.2% from 11.9%, reflecting a decline in gas prices and fuel prices.

Food price inflation eased to 7.8% from 9.7% in September, and inflation slowed for the seventh consecutive month.

However, the core rate of inflation, which excludes volatile food and energy prices, declined to a 16-month low of 4.2% from 4.6%.

 

Europe Indexes and Yields

The DAX index increased 0.8% to 15,748.17, the CAC-40 index advanced 0.3% to 7,209.61, and the FTSE 100 index rose 0.6% to 7,486.91.

The yield on 10-year German bonds declined to 2.59%; French bonds traded lower to 3.16%; the UK gilts eased to 4.17%; and Italian bonds inched lower to 4.40%.

The euro rebounded to $1.086, the British pound at $1.246, and the U.S. dollar at 88.79 Swiss cents.

Brent crude decreased $1.46 to $81.06 a barrel, and the Dutch TTF natural gas edged lower by €0.57 to €47.04 per MWh.

 

Europe Stock Movers

Alstom SA plunged 20.4% to €11.29 after the company struggled with rising inventories and challenges integrating recent acquisitions.

The French train maker is expected to cut as many as 1,500 jobs, lower its debt by €2 billion, and sell some of its key assets.

Chief executive Henri Poupart-Lafarge said in an interview with Bloomberg TV that the company may consider raising capital through an equity offering after exhausting other alternatives.

Infineon Technologies AG increased 6.7% to €32.67 after the company reported better-than-expected quarterly results in the fiscal fourth quarter and also held out for higher sales in the current quarter.

Siemens Energy AG advanced 4.6% to €10.72 after the company secured €7.5 billion in project-related guarantees from the German government.

Tullow Oil plc gained 7.3% to 35.96 pence after the company lifted its 2023 cash flow outlook.

Experian plc increased 6.8% to 2,865.0 pence after the credit card data company reported an increase in first-half profit.

Alcon AG declined 6.5% to CHF 63.94 after the Swiss eye-care company reported weaker-than-expected third-quarter sales.